The 4 Best Tech Stocks for 2020 - Barron's

The 4 Best Tech Stocks for 2020 - Barron's

Photograph by Troy Harvey/Bloomberg

In the end, the best technology (usually) wins. So in picking stocks, we’re always looking for the next great product or service that improves performance or productivity, ideally at lower cost.

For 2020, investors need to be looking at the next big trends and product cycles—the latest cloud software, Kubernetes, the new videogame consoles, and fifth-generation wireless (5G). The key is parsing the hype and analyzing areas where new tech is actually driving corporate growth.

A week ago, we covered how our top four 2019 tech ideas handily beat the S&P 500 and Nasdaq Composite. But that’s old news now. So we’ve again sifted through the major themes and come up with our top picks for 2020. The first two ideas are new to the column. The others have been mentioned before, but they deserve a fresh look in the coming year.

In the Cloud— Smartsheet (ticker: SMAR)

We’ve frequently discussed how corporations are shifting their tech spending from legacy on-premise applications to cloud native software due to efficiency gains and scaling advantages. The trend is still rich with ideas.

One of the ideas is Smartsheet, an under-the-radar company that’s using the cloud to become a leader in workforce collaboration. Its software enables employees to automate business processes and workflows with no programming knowledge.

Instead of manually tracking changes in a spreadsheet using cumbersome emails, workers can send out web-enabled forms to colleagues or vendors and automatically update data into a “smart” spreadsheet, saving time and reducing error rates.

Forrester analyst Margo Visitacion says Smartsheet’s main competition is old-fashioned Excel spreadsheets. “The limitations of sharing files via email in a world when you need almost instantaneous responses just got really frustrating for companies,” she says. Once Smartsheet is ingrained in corporate workflows, it’s hard to leave the platform.

In a recent interview, Smartsheet CEO Mark Mader expressed optimism about the company’s international expansion efforts and its recent launch of premade templates called accelerators.

“The workforce is looking to graduate from just consuming tech to actually utilizing it to their advantage,” Mader says. “Companies are looking to unlock more capacity within their business units.”

In its most recent quarter, Smartsheet grew sales 53% from the year earlier. While the company isn’t profitable, it had negative free-cash-flow of just $2.9 million in the quarter. With $563 million in cash on its balance sheet, Smartsheet has plenty of runway to invest in growth.

The stock isn’t cheap, trading at nearly 14 times next year’s estimated sales of $376 million. But RBC Capital Markets argues that the company can generate annual sales of $4 billion by penetrating just 10% of the world-wide office software user base. If Smartsheet continues to grow rapidly and maintain its leadership, the stock should do well.

Kubernetes— Datadog (DDOG)

Last month, we wrote about how an open-source software named Kubernetes has become the next big thing in computing, accelerating the move to cloud-native technology. Cloud apps increasingly run in aptly named containers. The containers hold an application, its settings, and other related instructions. Kubernetes enables developers to automatically deploy, manage, and scale those container workloads.

The trend, we noted, presents a challenge to some incumbents, notably VMware (VMW). But there is also opportunity. Datadog, which monitors cloud workloads, may be the best way to play the Kubernetes trend. Datadog’s key advantage, industry analysts say, is its ability to work across multiple cloud vendors.

The company, a recent initial public offering, has said that about 45% of its customers running containers use Kubernetes, up 10 percentage points year-over-year.

Over 10 years, Rosenblatt Securities analyst Yun Kim thinks Datadog can achieve 12% of an IT operations-management market, estimated at $35 billion today. Wall Street expects Datadog to generate $503 million in sales next year, up 43%, suggesting plenty of room for growth.

New Game Consoles— Activision Blizzard (ATVI)

Every five to eight years, the major console makers release a new generation of hardware devices. The latest consoles from Sony (SNE) and Microsoft (MSFT) are slated to launch in late 2020. That’s a good opportunity for investors since videogame stocks have traditionally outperformed in the year preceding the launches.

In August, we said Activision Blizzard was one of the best ways to play the new wave of consoles. We predicted this year’s Call of Duty: Modern Warfare could do better than expected, with blockbuster sequels to Overwatch and Diablo due in the coming years. Sure enough, Call of Duty broke records, and the company announced the sequels at its BlizzCon conference in November. Our optimism for Activision Blizzard’s stock stands.

5G— Taiwan Semiconductor Manufacturing (TSM)

The technology industry and Wall Street are counting on 5G to drive a multiyear boom for everything from chips to smartphones to telecom equipment. The reality in 2020 could be more nuanced. In the U.S., 5G could take more time to play out than investors realize. New networks remain in their infancy, while the latest handsets are only beginning to emerge. In China, though, 5G progress is happening much faster, thanks to government subsidies and more available spectrum.

As we wrote in October, Taiwan Semiconductor Manufacturing may be the best way for U.S. investors to tap into China’s 5G prowess. Taiwan Semi makes many of the chips that Huawei Technologies uses in its 5G infrastructure products. TSM should also benefit from the success of its customer Advanced Micro Devices (AMD), which continues to win share from rival Intel (INTC).

Here’s to another great year of tech products—and tech stocks.

Write to Tae Kim at tae.kim@barrons.com

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2019-12-27 11:15:00Z
https://www.barrons.com/articles/the-4-best-tech-stocks-for-2020-51577445300
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